Contacts

European Elections and the EU Green Deal: Double or Nothing

, by Sylvie Goulard, Romain Svartzman, Simon Dikau
Abandoning or watering down climate ambition would be an economic and geopolitical mistake for the EU, especially at a time of increased geoeconomic fragmentation

Shortly after the 2019 European elections, the European Commission presented the European Green Deal (EGD), an unprecedented package of policy initiatives seeking to make the EU climate neutral by 2050. The ambition of this plan was confirmed by the 2021 European Climate Law (which added an intermediary goal of reducing net emissions of greenhouse gases (GHG) by at least 55% in 2030, compared to 1990), and shortly after by the “Fit for 55” package of legislations aiming to make all economic sectors of the EU economy fit to meet this 2030 target. 

In practice, the EGD relies on multiple initiatives that intend to both review existing laws based on their climate and environmental merits and to introduce new legislation on issues as broad as low-carbon innovations, biodiversity protection, farming and circular economy. 

One of the main measures of the EGD is the reinforcement of the long-standing commitment of the EU to pricing carbon emissions, mostly through the European Emissions Trading Scheme (ETS) launched in 2005. For instance, with the EGD, the quota of carbon emission allowances (or "rights to pollute”) allocated to the sectors concerned by the ETS – which represent about 40% of the EU’s territorial emissions – is decreasing by more than 4% annually until 2030. This measure contributed to the increase in the price of the ton of CO2, which fluctuated between €50 and more than €100 between January 2022 and early April 2024. 

The EGD also comprises many regulations typically targeting industries not covered by the EU ETS. This includes, among others, the Carbon Border Adjustment Mechanism (CBAM), which seeks to avoid carbon leakage from firms subject to the EU ETS toward countries with weaker carbon emissions constraints; the banning of sale of thermal cars by 2035; the phasing out and banning of fossil fuel boilers in buildings by 2040; the commitment to plant at least 3 billion trees in the EU by 2030; or the mandatory reporting by non-financial corporations and financial institutions of the environmental risks they face and of the impacts they produce on the environment (through a double materiality lens).

 

Who wants to kill the European Green Deal?

As we approach the EU elections, the EGD is under attack. The severe external shocks suffered since the last election, most notably the pandemic of Covid-19 and the war in Ukraine, have certainly generated trade-offs between meeting short-term objectives (e.g. accessing cheap gas supplies) and staying on course to achieve the medium and long-term goals of EGD. 

However, trade-offs fears of short-term costs have been successfully spun into narratives by lobbying groups and far-right political parties to argue against ambition climate action. The recent decision of the Commission to withdraw an EU pesticide reduction bill is a case in point: while the numerous protests by farmers in EU countries over the past year have a variety of underlying causes (including calls for decent revenues), lobbying groups have been successful in conveying the idea that environmental regulation was the main – if not only – culprit to blame for higher costs. Likewise, car manufacturers have fiercely opposed the 2023 EU legislation aiming to ban the sale of new petrol and diesel cars by 2035, successfully shoring up opposition in some countries in this respect

While abandoning or watering down the ambition of the EGD may sound attractive to some in the current environment, doing so would without doubt be an economic and geopolitical mistake for the EU, especially at a time of increased geoeconomic fragmentation. 

In a world where other global players, most notably China and the US, are increasingly leading on clean technologies, not engaging in this technological race would be akin to accepting to become less competitive in the global economy

For instance, as Chinese electric vehicles increasingly make their way into EU markets, following the EU carmakers’ willingness to slow down the low-carbon transition would lead the EU to become a rather insignificant player in the low-carbon economy, while increasing its vulnerability to supply chains and technologies controlled by other countries.

Double or nothing

While it is clear that abandoning the EGD would be an economic and geopolitical mistake, one should also be clear about the scale and ambition of the task: sticking to the environmental goals of the EU can only succeed through major institutional changes, akin to doubling down on recent efforts while shifting course with respect to current weaknesses of the EGD.

First, the EU cannot forge a way forward without a proper industrial policy at EU-level, thereby needing to shift from a market-fixing approach (based on pricing carbon and regulations to which the market should adapt) to a market-shaping approach where the government has a stronger role to play, including by massively investing in new technologies and infrastructure, among others. 

The European Battery Alliance and the EU Critical Raw Materials Act are promising initiatives, but it is unlikely to see them make a significant difference if implemented through market forces alone when, at the same time, the US and China are massively subsidizing these sectors. The latter does not suggest that implementing such policies is easy, and this will require at the very least to carefully assess the conditions that enabled more or less recent successes (e.g. China’s industrial development, US Inflation Reduction Act). 

Second, there is an obvious contradiction between the ability to achieve these goals and the availability of public and private investments dedicated to the transition, which is insufficient. The recent Enrico Letta report and speech by Mario Draghi make it clear that the recent review of EU fiscal rules is not sufficient, and that more “radical change” is needed. Moving forward with the Capital Markets Union, at least in ways that can facilitate the channeling of private savings toward long-term investments with low returns, is key. But more will be needed, in particular with regard to a common approach to fiscal policy. EU may also have sowed the seeds of a common budget with Next Generation EU, a €750 billion investment plan (a third of which is dedicated to the ecological transition) adopted in 2020 and funded through, among other sources, a landmark issuance of EU common debt.

This does not suggest that in the future money could flow freely and for everything, especially as structural issues have not been resolved, which include: financial markets’ concerns about the size of public debt for some EU countries; the financing needs of other sectors (defense, education, health…) that may compete for limited human and material resources; and the fairness of cross border transfers among states with diverse tax structures. 

Addressing these issues may require controversial yet necessary measures. For instance, the communication and coordination between central banks and finance ministries may have to be improved, and central banks may well have to play a role in keeping governments’ borrowing costs low while making this compatible with their price and financial stability mandates, e.g. by adjusting their holding of sovereign bonds to each EU country’s sustainability efforts.

Third, we may need to go even further if we acknowledge that the ecological transition is more than “only” a massive industrial, fiscal, financial and monetary plan: it also requires a deeper transformation of the values that guide us, so as to learn to live within planetary boundaries. 

This could require putting sufficiency policies – defined by the IPCC as “a set of measures and daily practices that avoid demand for energy, materials, land and water while delivering human well-being for all within planetary boundaries” – at the heart of EU policies. 

As such, seeking to transform the EU into a powerful international player in troubled times while making it fit for forthcoming challenges invites us to revisit questions such as trade relations and the way in which we have organized our supply chains. 

For instance, the current draft of the EU-Mercosur trade agreement would enable EU consumers to not change their consumption habits based on cheap inputs from the rest of the world, at the cost of aggravating deforestation in the Amazon and locking-in Latin American countries in their role of agro-exporters with little value added. Could the EU develop an alternative trade and debt diplomacy, e.g. by linking trade deals and industrial policy to technology transfers or debt relief programs (e.g. through debt-for-nature or debt-climate swaps)? 

Currently, the macrofinancial and institutional structure of the EU prevents it from fully engaging in an unprecedented ecological transition, which is the only path that seriously responds to scientific warnings regarding our ecological crises and that would enable us to remain resilient in a geoeconomically fragmented world. As such, this structure needs to be revisited in ways that challenge the prevailing ideological and political order. 

Thinking that we can realistically move toward such radical transformations is probably disingenuous, but so is thinking that the EU can be a powerful actor capable of serving its citizens – in potentially 35 or 36 countries – while staying on its course. The latter would condemn it to oscillate between utopian goals without the means to achieve them, and growing authoritarian tendencies that will precisely keep exploiting the weaknesses of the existing institutional structure, thereby leading to dire environmental, geopolitical and socioeconomic consequences. It is time to engage in difficult conversations.

SYLVIE GOULARD

Bocconi University

ROMAIN SVARTZMAN

Bocconi University